Bitcoin: The Burglary That Broke It

So you see those rapid spikes in red volumes (the ‘red’ indicates that the trades were settling at lower prices than the trades that preceded them – green indicates the opposite), alongside the collapsing price? That’s the bitcoin market reacting to news that one of the Hong Kong based Bitcoin exchanges, Bitfinex, had been hacked – and that 119,756 bitcoins had been stolen. That’s a ±$65 million burglary (at mid-morning prices on 3 August).

Some statistics:

There are about 15.2 million bitcoins in existence right now.

So the theft involved 0.8% of the total bitcoins in existence.

The initial drop in value wiped out $2.5 billion or so from the world of Bitcoin.

This – this is real volatility. Can you imagine a bank heist causing the US Dollar to plunge by almost a fifth before recovering a bit in the space of a few hours?

I’m really not sure how so many people expect that Bitcoin can become a real currency when its value is so influenced by a sneak hack-attack of a paltry $65 million. I mean, that’s less than a rounding error on the deferred tax that Apple is housing in its offshore shell companies (if you’re interested, it’s about 0.1% of it).

In a deeply ironic twist, the world’s first free market currency has found itself entrenched in the world’s largest state-controlled economy. Although I guess it’s not that ironic: wherever you have state control, you have attempts to circumvent it. So it’s not too surprising.

But still, taking a bet on Bitcoin now effectively means taking a bet on China.

Here’s a quote from Bloomberg:

Bitcoin’s volatility, meanwhile, has attracted China’s horde of speculative individual investors, who are keener than ever to diversify out of yuan-denominated assets after a shock devaluation in the nation’s currency last year.

Comments

“This – this is real volatility. Can you imagine a bank heist causing the US Dollar to plunge by almost a fifth before recovering a bit in the space of a few hours?”

where were you in 2008 ?
multiple markets had drops between 10-30% in a few hours / days.
BIG difference to BTC is: they ONLY CRASHED that fast. took years and millions to regulate.
BTC was back up and running a couple hours later.

I think you’re confusing “drop” with “swing”. Volatility is the latter.

In any case, I think that it’s quite clear that 2008 was no simple hack attack and/or bank robbery. It was the collapse of multiple credit bubbles: the home mortgage bubble, the collateralised debt obligation bubble, the credit-default swap bubble (or opposite of bubble – the insurers and banks were selling them too cheap), the sovereign debt bubble in Europe: basically, a soapsuds of bad decisions and Alan Greenspan.

But you know what didn’t crash by 30% in 2008? The US dollar.

With markets, you expect volatility and/or drops. But with global currencies – which is how BTC is selling itself – those kinds of shifts are the kind of thing that lose you global status.